As one popular multilevel marketing meme featuring Buzz and Woody from “Toy Story” suggests, it seems like multilevel marketing is everywhere. If you have any presence on social media, you may have been approached by acquaintances, friends or family members to purchase everything from essential oils to comfortable leggings. You may have been asked to become a member of one of these organizations yourself. If you’re thinking about joining a multilevel marketing company, you should carefully screen the opportunity so you know the risks involved, the start-up costs and what happens if you don’t succeed.
What Is Multilevel Marketing?
The multilevel marketing definition is companies that sell to consumers through representatives. This is sometimes also referred to as network marketing. The representatives typically sell products and recruit new representatives. Anyone they recruit becomes a part of their downline, and they receive a percentage of the sales.
If a person the representative recruited also recruits someone, that person becomes a part of her downline. For example, if Susan is selling plasticware for a multilevel marketing company, she may sign up Michael to also sell plasticware. Michael becomes a part of Susan’s downline, and Susan receives a percentage of anything Michael sells. If Michael recruits Chris to be a part of his downline, both Michael and Susan receive a percentage of what Chris sells. This is where the “multilevel” aspect of multilevel marketing comes into play.
What Is the Difference Between a Pyramid Scheme and Multilevel Marketing?
A pyramid scheme is an illegal investment scam. In one common type of pyramid scheme, there is no product sold. Instead, people are asked to invest money for a high rate of return. Those who entered the pyramid scheme early are paid a return, which is actually money being paid into the scheme by new investors. This type of pyramid scheme is a Ponzi scheme. These pyramid schemes eventually collapse.
The main difference between a pyramid scheme and multilevel marketing is how the company makes a profit. With multilevel marketing, most of the profits are generated by product sales rather than new recruits investing in the company and buying inventory. With a legitimate multilevel marketing company, the bulk of your profits will come from sales that you make and not from recruiting other distributors.
Positive Aspects of Multilevel Marketing
There are some positives to working with multilevel marketing companies. For example, you can typically start working with a multilevel marketing company with a minimal up-front investment. There is no set schedule, so it’s easy to start a multilevel marketing business while you’re still working full time. Some multilevel marketers are eventually able to focus on their side business full time, but you can ramp up gradually rather than taking a big risk. You aren’t required to employ other people, so you don’t need to worry about payroll costs and paying for workers’ compensation insurance.
With many multilevel marketing companies, you don’t have to keep a lot of inventory on hand. You may keep samples of your products for your customers to examine and try out, but when your customers are ready to order, you can order their product from your company directly.
You also can enjoy the tax advantages of running a business. You can deduct business expenses such as the cost of advertising and the cost of needed office supplies. An experienced tax preparer can help ensure you deduct the appropriate tax expenses.
Negative Aspects of Multilevel Marketing
A lot of the negative aspects of multilevel marketing companies depend on the company with which you choose to work. Some companies require larger investments of $1,000 or more to get started, and if you’re not successful in selling your inventory, they may not allow you to return it. Some companies do allow returns, but they may not reimburse you for the full amount you paid.
Your company may also pressure you to increase your sales. If you’re only selling your product part time or if you have a lot of personal commitments, you may be left feeling stressed. You also may be pushed to recruit new representatives. If you got into the business simply to sell the product, you may not want to deal with signing up and managing new representatives.
Because of the pressure to make sales, you may feel obligated to approach your family and friends. This can put a strain on your relationships. If you can, you may want to cultivate sales outside of your immediate circle so you don’t need to keep asking family and friends.
This can be further complicated by competition. Although some companies limit the number of new representatives in a given area, most will allow an unlimited number of recruits. This means that a small town could have five or 10 representatives all selling the same product and competing for the same potential customers.
It can also be difficult to make a profit. Although figures vary, most studies indicate that far more people lose money by running a multilevel marketing business than the number of people who make money. As with any business, though, the results of your business venture depend on your efforts and whether you treat your new business as a business. Even though these ventures aren’t full time, you will need to devote regular time to upkeep, marketing, sales parties and bookkeeping.
Choosing a Multilevel Marketing Company
If you think multilevel marketing might be a good fit for you, you have numerous options from which to choose. The first aspect of a potential company to look at is the product the company offers. You should choose a product in which you believe and that you use regularly. If you don’t use the products regularly, you should purchase some from a distributor to try them out. You don’t want to put your name behind a product that is ineffective or low quality.
One type of product that you should carefully screen is any nutritional product. According to a study in Clinical Nutrition ESPEN, the wellness category accounts for 35 percent of all multilevel marketing sales. According to the same study, some nutritional products may be toxic, and some companies make claims that aren’t backed up by evidence.
Once you have a product in mind, you should dig into the fine print of the multilevel marketing company. Conduct some online research to see if the company has complaints about the product or service. Examine the overall reputation of the company and look for any instances of deceptive business practices.
If the company has a good reputation, you will want to talk to the representative who is recruiting you. Ask questions to ensure you completely understand how the company works. You should be clear on the compensation structure and on how much you need to spend to get started. If the company claims you will make a specific amount of money, ask for evidence to back up those claims.
You should also find out their return policy. Ideally, you will sell all your inventory, but if you don’t, you should be able to return the product you purchased for a refund. Some companies will only refund you a percentage of what you paid, or they may assess other penalties. In addition to purchasing products, you may also be expected to attend training events. Make sure to find out what the training requirements are and how much those training events will cost.
You should also make sure you have a direct company contact. If you have any concerns or questions, you should have someone to whom you can talk at the company. If the company is hesitant to give you a direct point of contact, you should consider that a red flag. Your recruiter will make money if you join, but you should resist any pressure to sign up until you feel completely comfortable with the company.
Getting Started With a Multilevel Marketing Company
Once you’ve found a company with a product that you enjoy, you’re ready to get started. Many MLMs have starter packages with inventory you can purchase. Some packages may have inventory you don’t actually need, though. If you’re not sure where to start with purchasing inventory, talk to other distributors about what typically sells the best.
Take the time to develop a marketing plan that goes beyond your family and friends. Although many will be happy to help, repeated purchase requests may annoy the people you know. One approach many MLMs use is hosting sales parties. You ask a friend to host a party and invite her friends. You demonstrate your product and make sales to the people at the party. Most MLMs offer incentives to people who host the parties, such as significant discounts on purchases or free products.
You can also take advantage of social media to reach out to friends and families. You may want to create a Facebook group that’s focused on selling your product. Many clothing marketers take this approach. Keep your target market in mind when you’re establishing your social media presence. Many millennials use Instagram, for example, so if that’s your target market, you should try to post regularly.
Keep your marketing efforts interesting to your audience. Provide information that solves a problem they have while keeping your sales message subtle. If you’re selling makeup, for example, you may want to post a makeup tutorial that someone could use regardless of the makeup brands she buys. Mention the products you’re using during the video and include a link to your sales site. It’s easy, helpful and appealing.
Let people know what you’re doing. Keep business cards and small product samples handy to share with people you encounter. A tired grocery store cashier might appreciate a small hand lotion sample, for example. Keep track of your contacts and follow up periodically. Develop an email list and send out useful emails with information on how to solve problems your customers have. If you’re targeting busy parents, for example, you may want to send out a quick recipe or two that you enjoy.
Succeeding in Multilevel Marketing
Given how many distributors there are for many multilevel marketing companies, it’s important to find a way to stand out. You may want to offer discounts (depending on your company’s policies) or develop a rewards program for loyal customers. Rather than having the company mail products to your customers, have them delivered to your home. Package them attractively and deliver them personally. Providing a higher level of service can help you stand out from the crowd.
As you make sales, you may feel some level of pressure to recruit new distributors. If you have customers who genuinely enjoy your product, you may want to approach them about the opportunity. Paint a realistic picture for your potential recruit. Explain the pros and cons of joining your company. You don’t need to make exaggerated claims. Many people are looking for a way to bring in a part-time income. If you have an opportunity about which you’re proud, it will sell itself.
- Investopedia: Multi-Level Marketing
- Investopedia: Pyramid Scheme
- Federal Trade Commission: Multilevel Marketing
- Forbes: Would You Join A Multi-Level Marketing Company For Retirement Income?
- Inc.: Multilevel Marketing
- Fundera: What You Need to Know If You’re Considering a Multilevel Marketing Business Venture
- Forbes: Beachbody Coach? Rodan & Fields Consultant? At Tax Time, Beware The Hobby Loss Rules
- The Balance Small Business: The Likelihood of MLM Success
- ScienceDirect: Is Multi-Level Marketing of Nutrition Supplements a Legal and an Ethical Practice?
- The Balance Small Business: MLM Success Starter Guide
- The Balance Small Business: 10 Tips to MLM Success